Featured Author:

Mark Kantrowitz

As a nationally recognized financial aid expert, Mark has been called to testify before Congress about student aid on several occasions.

He has served as a guest columnist for the New York Times and the Huffington Post and has been interviewed regularly by major news outlets, including the Wall Street Journal, USA Today, MSN, CNN, NBC, ABC, CBS, CNBC and more.

Mark is the author of five books, including three about student aid. His most recent book, Secrets to Winning a Scholarship, helps families find and win scholarships. He is also on the editorial board of the Council on Law in Higher Education and the editorial board of the Journal of Student Financial Aid, a member of the board of directors of the National Scholarship Providers Association and a member of the board of trustees of the Center for Excellence in Education.

Mark is ABD on a PhD in computer science from Carnegie Mellon University (CMU) and holds Bachelor of Science degrees in mathematics and philosophy from MIT and a Master of Science degree in computer science from CMU.

The interest rates proposed for the unsubsidized Stafford loan —
the 10-year Treasury rate plus 2.93% or 3.0% — are similar to
the old CMT plus 3.1% variable interest rate that was available on
PLUS loans made before June 30, 1998, but without any cap on the
interest rate. Effectively the hybrid interest rates represent
interest rate increases masquerading as interest rate cuts.

If interest rates were to return to pre-credit crisis levels, the
interest rates on the unsubsidized Stafford loan will increase to
about 8.0% under both proposals, much higher than the current 6.8%
interest rate. (The interest rates on the subsidized Stafford loan
will increase to 6.0% and on the PLUS loan to 9.0% under the
President’s proposal and 8.0% under the Republican proposal.) But it
could be even worse, since there are no caps. Based on 10-year
Treasury rates from the early 1990s, the interest rate on the
unsubsidized Stafford loan could be as high as 12.0%. (The interest
rates on the subsidized Stafford loan will increase to 10.0% and on
the PLUS loan to 13.0% under the President’s proposal and 12.0% under
the Republican proposal.)

Both proposals would save the federal government tens of billions of
dollars over a 10-year period, money that would be paid by future
borrowers.

The Republican proposal would use the savings for deficit
reduction. The President’s proposal would use the savings to expand
eligibility for the Pay-As-You-Earn Repayment (PAYER) plan to all
borrowers. Currently borrowers must have at least one loan disbursed
in FY2012 or a subsequent year (on or after 10/1/2011) and no loans
from prior to FY2008 (before 10/1/2007) to qualify for this repayment
plan.

The President’s FY2014 budget also reintroduces a proposal to expand
the Perkins loan program from $1 billion a year to $8.5 billion a year by
turning it into an unsubsidized Stafford loan, designed to replace
private student loan borrowing. The increased revenue from the
unsubsidized Perkins loans would be used to fund an expansion in the
number of Federal Work-Study jobs, doubling the number of Federal
Work-Study jobs over a 5-year period. In the first year there would be
112,000 additional recipients of Federal Work-Study jobs, out of a
total of 809,000 recipients, and total Federal Work-Study funding
would increase by $150 million as compared with 2012.

Lack of Interest Rate Caps Yields a Bad Bargain

Trading off lower interest rates now for higher interest rates later
is a bad bargain. Even if interest rate caps are added to the
proposals to prevent double-digit interest rates, these proposals
still draw attention away from the real problem, which is the growth
in the amount of debt. New Stafford and PLUS loan debt will total about $117
billion in FY2014. Average debt at graduation continues to grow
every year because of the failure of grants to keep pace with
increases in college costs. The federal and state governments continue
to cut their support of postsecondary education on a constant
dollar per-student basis. The most effective way of making college
more affordable is to reduce debt by increasing grants, not by
tinkering with the interest rates.

The President’s FY2014 budget proposes to increase the maximum Pell
Grant to $5,785 in 2014-15, up from $5,645 in 2013-14, a 2.48%
increase. A total of 9.4 million students would receive Pell
Grants. That’s a baby step in the right direction. But much more money
is needed to make a dent in college affordability, not just a small
$140 inflationary increase in the maximum grant. Instead of discussing
the possible doubling of student loan interest rates, student aid
advocates should be demanding that Congress double the maximum Pell Grant.